Art's Way Manufacturing Co Inc (ARTW) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Today is Thursday, April 12, 2012. And welcome to the Art's Way Manufacturing Company Inc. first-quarter financial results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). Your call leaders for today's call our Jim Drewitz, Investor and Press Relations representative; J. Ward McConnell Jr., Chairman of the Board of Directors; Ms. Carrie Majeski, President of Art's Way Manufacturing.

I would now like to call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you very much, and good morning, ladies and gentlemen. Before we begin, I would like to draw your attention to -- except for the historical information contained herein -- the statements in this conference call are forward-looking, and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause Art's Way Manufacturing actual results of future periods to differ materially from forecasted results. Those risks include, among other things, loss of market share through competition or otherwise, the introduction of competing technologies by other companies, new governmental safety health and environmental regulations which could require Art's Way Manufacturing to make significant capital expenditures.

The forward-looking statements included in this conference call are only made as of the date of this call. And Art's Way Manufacturing undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described under the caption Risk Factors in the Company's annual report filed on Form 10-K with the Securities and Exchange Commission.

With that completed, I'd to turn the call over to Mr. Ward McConnell. Mr. McConnell?

Thank you, Jim. Just a short start here -- Art's Way has had a good quarter, in our opinion. And we think that we've done quite well. Our increase of earnings and our increased sales are much increased from year ago the same quarter. And while that's also true, our backlog is continuing much higher. It's about $5 million higher than it was a year ago at this same time as of last Friday.

Scientific has the order that we mentioned to you some -- last time, and we've released on that's going to California, which has been a big boost for us versus last year when we had very little business in Scientific. And the good news is, it's ongoing, because very little of it crept into the first quarter. The vast majority of it is yet to be invoiced. So I think that's good.

We've gained back some of our customers down in Vessels. [Quilligan] is finally back with us, and a couple of other customers. And so we will be creating now a backlog down there, and it's beginning to show that we are shipping on time and we are shipping good product.

We are now pretty well going in West Union. It's not going as fast, probably, as we'd hoped. But we are shipping product out of there and shipping more out than we did a year ago at this time, as well. And we have -- if you come to our meeting on the 26th, we are going to show you an awful nice-looking facility and an awful nice, neat place where everything is in place and in order and so on.

So with that, Carrie, are you ready to review the numbers?

Yes, I can do that. We are very pleased with the increase in sales, over the last year's first quarter, of 35%. Manufacturing sales for the first quarter were $3,988,000 versus $3,656,000 in the prior year, and that was a 9% increase for us. The large increase came from Art's Way Scientific, with a large job that we have going on there. Their sales were $1,994,000 versus $445,000 in the prior year. Our Art's Way Vessels segment did have a decrease in sales. Their sales were $330,000 for the quarter versus $563,000 for the first quarter last year. This was as a result of -- we had two large jobs in the plant towards the end of February that we put a lot of time and effort into, and materials that did not ship the first quarter. So that will be a little bit of a carryover for us. And we anticipate our sales to rebound a little bit in the second quarter with the backlogs that we have on hand.

Our gross margins for each segment did increase. Most significantly was Art's Way Scientific, the increase from a negative gross margin of about 3% to 23%. Manufacturing also had a nice increase from 16% to 26%. Vessels does still have a negative growth margin, but we are showing signs of improvement there. Theirs went from a negative-19% to a negative-12%.

We saw significant improvements in operating income across the board at all three segments. Manufacturing's operating income increased by $386,000. Last year, we had a loss of $250,000 and this year we are showing income of $136,000. Scientific was at a loss last year of $205,000 versus $314,000 this year, so that was an improvement of $519,000 for the first quarter. And Vessels had a loss last year of $204,000 versus a loss of $88,000 this year.

Again, we feel like we have much stronger management in place at Vessels. And we are seeing improvements every quarter, not as quickly as we would like to see them, but it is coming along. We have stronger management in West Union, and here in Armstrong at the manufacturing plant, as well. We are starting to see upticks in efficiency, and we anticipate that those will be with us as we go forward.

Net income from Manufacturing ended the first quarter at $55,000 compared to a $169,000 loss last year. That was an improvement of $224,000. Scientific, again, had the largest improvement at $232,000 versus a loss of $146,000 last year, an increase of $378,000. Vessels had a loss of $94,000 compared to a loss of $169,000 in the prior year. Our earnings per share are improving, and we think that it was a strong quarter. And we are very pleased with the results.

Ward?

Yes. Thank you. I'm ready for questions.

All right, Erika. Let's go ahead and go to questions at this time.

(Operator Instructions). Gary Kennedy, Kennedy Investments.

What about the beet situation? Has that strike up there been resolved? And do you anticipate more business up there?

I don't know about the strike being resolved. But I do know that we sell our beet harvesters basically in November, December, for the following year. So we have our orders in for those beet harvesters that go up there this year. There are -- it's a good year for us with them. But we are down a couple of units, is all. So we are not going to see hardly any change in our income from the sugar beets.

The other question I had is, do you anticipate any more modular building orders? I knew you got one big one there from California. But is that bidding and stuff improving any?

Yes, there is an awful lot of activity suddenly come up. And we are actually starting to get the quotes out, we've got so many in here at this time. We have picked up another small building. And that's closing -- in fact, going to ship next week. But, yes, activity is strong. And we feel very comfortable that we can't pile on this one in -- for California. But it's going to last on through August, September; fading away back when it gets to September. But we are looking, now, to close its something that will [select half] after then. But yes, the activity is excellent.

Joe Dancy, LSGI Advisors.

Hey, Ward. Good quarter. I'm just curious -- I was following on with Gary -- are you guys going with Scientific to any shows? And have you got any interest from -- apparently, with this $7 million order, is there anybody that is looking at what you're doing and thinks it's worth pursuing a similar type of arrangement?

Well, Joe, the -- I can't be more specific, I guess, but there is a lot of activity. And there is a lot of quoting going on. And I talked to Dan just yesterday, and he was telling me that he is just inundated with calls. As far as the shows are concerned, we go to virtually the same shows year to year. And he's at a show this week. We're doing all the same shows we've done in the past. We haven't cut any of them out. I think there was one small one, but nothing -- it's virtually the same.

Okay. Excellent. I'm just curious -- apparently, this $7 million project -- that will pretty well keep Scientific busy for the entire, the next three quarters, from what it sounds like.

Well, somewhat, yes. But as I said, they slipped one in this quarter, or this current quarter that we didn't expect them to. We've got -- it's going to deliver on Monday. It's a small one. But he's putting those in, too. We are trying to keep those going. We had we don't want that to drop off to nothing in September.

Right, right, okay. And, apparently, I think Carrie mentioned that a lot of this revenue is not recognized on this project in quarter one. It will be quarter two and quarter three. Is that correct?

That's correct. There was very little -- small percentage of it was recognized in quarter one.

Okay, excellent. Jumping to the Manufacturing sector for the ag products, are you -- do you see anything out there that looks like it might be a good line to acquire, or at a reasonable price? Or have you looked? Or has anybody approached us? Or do you have -- can you give me any -- can you talk about it at all?

I can talk a little bit about it. We're looking at a couple of things right now. Generally, I look in farm machinery, but farm machinery people are all very darned profitable. And not many of them are looking to get out right now, as there has been in the past. But there are some out there, and I'm looking at a couple of them right now.

Excellent. And it sounds like the West Union facility is up and running. And, have we hired -- I knew you had a job fair there a year or so ago. And it about sounded like everybody in town showed up. Have we hired anybody out there? Or have we transferred people? Or are we just --

Well, round number is about 20 people. And I think at that job fair we had 300 apply. But we have got about 20. Are you going to go up there on the tour?

Oh, I definitely want to take a look at the building. I've heard so much.

Yes. You're going to be very, very pleased. We've got a manager there who is very neat and clean and very organized. And it really looks nice to us when we make our tour there.

Yes, when you acquired it, apparently just from what I've heard, the feedback is -- you got an absolute steal on the facility, which is what you like to hear.

Yes, we thought so. We still think so. I think we paid about $1,250,000 for nearly 200,000 square feet of very, very nice property.

Excellent. Going to Vessels, that seems to be our kind of Achilles heel almost every quarter. And it sounds like we are slowly moving, digging out of the hole. Do you have any comments with regard to going forward? Are we still going to target the water treatment area? Or is there anything else? There has to be, Ward. There has to be some other small segments that we could target, you would think other, than water treatment to get some --

Of course, water treatment is enormous.

Yes, that's strike two.

And we do have -- before Pat O'Neill came with us, we weren't doing anything on the water. Or we were doing everything commercial, chemicals, and so on. We haven't got much of that. But the water thing is coming. We lost a lot of customers over the last couple of years. Our quality was pretty poor. And as a result was that we didn't get repeat orders from those customers.

We tackled that hard. And we have $1 million worth of quotes out right now that aren't coming. And I think this month will -- we did $80,000 last month, or something like that -- last week, I mean. And this week we've gotten in much more than that. It's beginning to come that way. But the product is -- we've cleaned up the product. We've cleaned up the quality. We've cleaned up the facility. It's a very -- it looks like a nice business today.

Excellent. Excellent.

I think it's got -- it's really there. And I've said that over the last two quarters here. But it's there, more today than it was those two quarters.

All right. Yes, as long as we're moving forward on it, it sounds pretty positive. But this is a seasonally weak quarter for us. And I -- actually I was going to congratulate -- this is the $0.05 earnings per share is the best earnings we've had in four years now, for the quarter one, which is -- it's the best start since 2008, which is great; and also the impressive gains in sales.

I know you don't give guidance, but we are up 35% from year-ago quarter. I assume -- you may or may not want to comment on this -- I assume, just going forward, you aren't going to have 35% gains. But in all three segments, we should see sales gains or have a pretty good chance of a robust sales year, in any event.

That's right.

Okay. I figured that.

And, you know, the corn prices are remaining strong. And soybean prices are remaining strong. And agriculture certainly looks like it's -- everything we read in our ag press is a strong for this year. We don't see anything there that's going to slow us down. And the export business, in the corn and so on, is way up. And the futures are up. And so, I think -- we certainly expect it to continue to be a good year in ag.

I know Creighton University does a farm equipment survey every month. And it's always got, for the last 1.5 or two years, it's been showing expansion in the farm equipment market. And it does, it still shows expansion -- I mean, healthy expansion, which is good. I don't know where they get their data from, but it seems to be pretty much on point. And, in any event, I look forward at the shareholder meeting to get the tour of all the facilities and it should be -- especially West Union. I've heard so much about it. I think it will be a worthwhile to visit. So, thanks again.

Thank you, Joe. I look forward to seeing you.

Nick Halen, Sidoti & Co.

Good morning guys. I just have a couple of quick questions. Just in terms of the $7 million contract, I know there was the opportunity -- I believe it was an installation contract to add about $2 million to that contract for, I guess, $9 million total. Are you guys still expecting to get that $2 million?

Absolutely.

Okay. And now I guess that $1.99 million that you did in the quarter on the Scientific side, how much of it was that? I know you said it's a small percentage. But around how much -- was it about $1 million in the quarter? Is that roughly what was related to that contract?

I think slightly over $1 million.

A little over $1 million. Okay. And then it definitely seems like you're making some traction, in terms of profitability on the Vessels side. But in saying that, I mean it still is losing money for you guys. I mean, obviously, you guys are expecting that to turn around and things to get better from here on out. But do you have an internal timeline, in terms of if this thing doesn't pan out within the next, say, two or three, quarters, we'd reevaluate? Or have any thoughts, anything like that, have come in to mind?

Obviously, we explore all possibilities. But that isn't one of the top ones.

Okay, so I guess --

We can be profitable. There isn't any doubt that we can be profitable with it.

Okay. So I guess you're thinking about it. But, realistically, you're under the assumption that it will become profitable in the near future and continue that way going forward, I guess.

Yes, that's right. It's been through its hard times.

Yes. Okay. Great, thank you.

Sam Rebotsky, SER Asset Management.

Good morning, Ward. I'm glad that you're becoming more and more comfortable as each quarter goes by, which is very good. And the $21 million backlog at January, does -- and if we take it to currently -- did you say you added another $5 million, which would bring you up to about $26 million now?

No, no. No, no. That's not correct. Actually, the backlog is $18,500,000.

That's now, at the current time?

That's last Friday.

Okay, okay.

But that's no surprise. The -- we had a good first quarter on ag sales. We shipped out of that. And right now, we have -- we've not shipped our sugar beet harvesters for the year. And that's going to be taking a dent in that, too. But those are always high sales volume for us. And so, I don't know, I think that's going to drop. But it's $5 million over last year.

Okay, okay. And is -- in my recollection, had the pipeline been in the $50 million to $60 million range? Is that similar now, or am I off-base on that?

Say it again?

The pipeline -- what you're bidding on, the bids that you have that's not in the backlog.

Well, that always remains high. I don't have the figures today.

Okay. Does it seem to be higher than the last quarter, or is similar?

I'm just guessing. I think, probably, because we've had this flush of action recently.

And has there been any more of the financing? In other words, have you looked to do the financing of the Scientific facilities? Or is that necessary? Or are you finding more money that's flowing into the -- letting the universities purchase these buildings?

Well, that's a tough question, too. The cash flow -- we have not sought any additional financing. The -- we spent a couple of months this winter with our short-term line of credit paid out. We're currently into it quite a lot because of this job in California. And because we are not paid -- we are paid after-the-fact rather than in front of the fact, as we do in some of these -- but, and then, really, we have a time lapse between the time we build it and we invoice it. And they take their 40 days to pay it. But, we still -- our short-term borrowings are about the same. And we still have -- I have no worries about that, unless we get sole payout at California. But I don't think we will.

Okay. And one further question -- as far as your capacity to add production, what percentage or how many shifts are you working? And how much additional capacity can you add to what you're producing now?

Well, I think West Union and ag has given us the opportunity to increase our capacity. And, the building at -- we have 18 units in that building in Monona under construction at one time, which is a lot. We have -- this California job is 24 buildings. About 18 of them are being worked on simultaneously, which helps us. And it gives us more efficiency with 18 than it does with one at a time.

Well, that sounds good. And I assume you have enough staff to do this, and you will continue to have this staff. Or do you have to hire people when the jobs come in, additional --

Well, this time we hired someone that came in. Because last year was so slow, we had to cut back quite severely. And we have more people there now than we had last year. But we're having a little bit of overtime. We have a commitment to deliver these 18 buildings in May, and we intend to withhold that. We're going to be able to meet that requirement. So, it will be, probably, overtime will go away come later. And I think we'll be -- I don't know. It depends on what happens with it. We've got lots of capacity there.

When we built that building, which was only three or four years ago, we -- it's built specifically for what we're doing. And it was set up to do several bays at a time, with two in each bay. And this is the first time, really, it's been utilized even remotely that close. So we have lots of capacity at Scientific. We have capacity every place we're at.

That sounds good. Andy $18.5 million will be completed in the current fiscal year?

Yes.

Wonderful. Ward, it sounds very good. (Multiple Speakers) keep up the good work.

None of it is for delivery beyond the fiscal year.

Great, great.

Rich Lorenzo, Great Plains Financial.

I received a proxy, and was wondering if you could expound on the proposal to amend the Company's certificate of incorporation to increase the -- or pretty much double the number of authorized shares, and wondered if you could expound on that a little bit?

They are just in reserve. They are not -- we have no programs using them at this time.

Okay. So those are just going to be sitting there for -- potentially down the road?

That's right.

Okay. All right, thank you.

Because it takes so long to get approval on them, if something comes up six months from now, we would be -- not be able to do it.

Okay. But there is no plan in place for -- to use those at this point?

No, there's nothing currently in place to use them.

Okay. All right, thank you.

Roger Miller, Foggy Daze International.

I'm going to go off the beaten path a little bit. First, about Vessels -- we talked about water treatment today. And in the past, you were into chemicals. Is that correct?

Yes, and other.

Well, let me ask you this. This is just throwing a dart out there. Has anyone looked into natural gas? Containers for natural gas or anything to do with that industry? Since natural gas, at the moment, is hitting all time lows. And it's being drilled all over the Midwest, specifically West Virginia is number one; you've got Pennsylvania, Ohio; and up in the Dakotas.

We haven't looked very hard at it. But we've looked a bit in North Dakota. There's a company up there called Pro Tank. And I've had a dialogue with the ownership of that. They're expanding their tank shop in -- I think it's Minot. But we have not really -- I think, I also think maybe we're misleading about the water thing. We've got a large contractor that we've got an awful lot of stuff quoted to right now, but it is nothing to do with water.

We're not all water. We got water but we don't have everything as in that sector. But the customers we had in prior years were totally out of water. In the last couple of years they've become in water. And we really teed off a lot of customers back, five years ago, with -- we had to move out of our building. We didn't have a home for a year. And we were -- we lost some of those customers back in those days. So water is helping us get back up.

Let me just give you some facts, very quickly. Natural gas at the pump is selling for as high as $3.00 a gallon in the Columbus, Ohio, area and as low as $1.80 right outside of Columbus, Ohio. That's at service stations to the public, $1.80 a gallon. At $0.66 a gallon, out of the home, which -- it costs $5500 to $7500 to set that up. GM is in the process of building natural gas pickups that also run on gasoline. And it costs $10,000, approximately, to convert any vehicle to natural gas. So, because of the price of the fuel, this is -- this industry is booming at the moment. And, I know they are hiring all over the state of Ohio, West Virginia, and Pennsylvania for drilling and fracturing.

Is Boone Pickens up there?

Halliburton is in Zanesville. I don't know that Boone Pickens is here. But they are getting swamped. Here is a figure that will open your eyes up. BP just paid $900 million for the rights to drill, in a small part of Ohio, to a homeowners association. Now what this association is, exactly, I don't know. But that figure came out just a few days ago. Now, BP doesn't just throw around money for nothing.

And the tax on each barrel of oil coming out of Ohio is $0.20 a barrel right now. And you know, oil is selling at the present time for -- what, about $102 or so.

So, another thing I wanted to bring up, did I miss the thing about leasing in Scientific? Because I was on a couple of other calls. Did you go over that? Any new leasing with Scientific, or --

Yes, we do. Yes, we lease -- we've got some buildings out on lease now. And we're offering it. And a lot of the inquiry we have in-house right now is about leasing. Yes.

Is that something you're going to expand on? We've gone over that on other conference calls.

Well, we'd like to. However, in our learning curve here, we've taken a very, very short-term view on it. We don't put any five- and seven-year leases out. We do two-year leases. And it gets pretty pricey for them. So we are studying now how we might get to, be able to get out five-year leases or seven-year leases, which would reduce the cost per month rather dramatically from what we've done in the past.

So, but we're learning more about it all the time. And we're working some with Wells Fargo to put together a program on it. I think that's going to help us a lot in the future. And we need to get more into it. But we've been -- we have, I think, three buildings in three different locations out right now. And it's working fine.

We were pretty heavy-handed with our pricing. There's a big difference between a two-year lease or three-year lease in five or six years, when you come to monthly payments. For the governmental agencies that we've leased them to, we did one for the United States government out in Puget Sound. That's one of our leases. And they like the lease deal.

Is there anything you'd like to state about the difference this year versus last year, when you had that loss? And summing it up, I realize that Scientific is doing so much better. And going forward, it looks like it's going to continue going forward. But is there something you would like to say about the difference in the Company right now?

Yes, I can tell you one thing that's really different in the Company. And it is not apparent on any numbers that you guys have had so far. We've got new management in so many places, and there has been a total different style management. We've gone out and tried to replace and get better people, and we've succeeded. We've got a good manager -- very good manager down in Vessels. We didn't have that. We have a very good manager -- have had Dan Palmer, and he is good anyway, but over -- we have a new production manager who started December 1. We have a backup for him, that's QC. We have not had a QC manager, and this man has got a great background, and he can back up some of the other things if need be.

We -- it just -- we have a whole new cadre of people that we've put together over the last couple of years that just upgrade us immensely. The guy who had Vessels started in February of '11 and he -- I wish you guys could all go see it -- and girls. It's just a changed, changed place from what it was before. And we've had customers -- I had a customer in -- finally convinced him to come take a look at Vessels. He had bought some tanks a couple of years ago and had trouble getting paid. And we had -- I worked with him and finally had to take a discount because of the quality and so on. We suffered that and, he -- I finally got him to stop to see if see us again. And he went in the plant the other day and sent me an e-mail telling me, not the same place. That's refreshing, and it's really true.

I find that I go about once a month to each one of those locations. And our people -- we've got new people, and they are better people. And we've upgraded it so much. We went pretty fast to get these outposts going. And as you probably realize, everything I ever bought has been broken when I bought it, and started from losses. And they are all profitable because of people, not because of me. That's a big change in the Company. And we're very proud of that.

So, going forward, because you don't give guidance, you feel very confident about sales and profit. Is that correct?

Yes.

And then, after we get done, or you get done doing the Scientific, the huge order?

Yes.

I guess the big question hanging over Scientific, can they continue to deliver? What's your thoughts on that?

Well, the activity is strong. We went through the period, starting about two years ago with the stimulus package. And every university in America made an application for laboratory -- for the type of equipment we have. None of them got funded. And the university waited for them to get funded, and then they didn't get funded, and then they started all over again. And it's a long process for them to get approval for these projects.

So, they lost probably 1.5 years and the projects just died. And so then they begin to take off, because they decided they're going to use their trust funds or whatever. And so they get going again. But some of these projects are five or six years in the maybe stage. And then they break loose. And so that's what's happening again. That cycle came along, and just, it stopped. It was the stimulus packages, and then it cranked up again. And it's cranked up right now.

Do you think that's got anything to do with these biotech companies doing -- being a lot more successful? And, at the moment, they seem to be going forward with a lot of vaccines. And we are hearing positive news on different -- maybe not cures, but advancements in medicine that we haven't heard in the past, all within the last year?

Certainly that's -- yes. But the government is so much into this tool that you don't know what they're going to do, of course. But right now I think we are in an up cycle. (Multiple Speakers) announces a stimulus package.

Okay, well, hopefully I can see you in Iowa. I'm not sure that I can. But I would like to come.

Roger, come see us. You've never been there, have you?

No, I haven't.

Well, that's why we've put together this little tour. I think you'll enjoy it if -- we are quite proud of it.

Gentlemen, at this time I have no further questions.

Ward, why don't you mention one more time -- time and date for The Annual Shareholders' and again, invite everyone to show up.

Well it's on -- I've got to look myself here. It's on April 26.

April 26.

Carrie, what date is it exactly?.

Thursday, April 26.

Yes. And it starts in the morning at 9.00, I believe. I don't seem to have that exactly in front of me.

They need to be there 15 minutes early to register.

Yes.

And the meeting typically goes relatively quick. It will probably take about half an hour or 45 minutes between registration and the meeting. And then we will immediately start our bus tour.

We're going to go first to --

In the first half, will be in Dubuque at Art's Way Vessels. And then we'll be heading up to Art's Way Scientific in Monona. And then we'll be stopping in West Union at one of our Art's Way Manufacturing facilities, and then turning around and going back to Dubuque. And that will take most of the day.

Well, everyone is invited. And Ward, Carrie, great call. And thank all of you for participating.

I thank you, too. We want our stockholders to know what we're up to. Thank you.

Thank you.

This concludes today's conference call. Thank you for attending.